Speculation over Synlait’s next steps

IS Synlait Milk heading for a capital raise, or is there a more radical answer to its balance sheet problems?

Alongside its April 24 earnings downgrade, Synlait said it continued to actively engage with its banking syndicate, which it said remained ‘‘strongly supportive’’.

Synlait previously said it was reviewing its capital strategy to ensure it had the appropriate funding for 2024 and beyond.

The review’s focus was primarily on its debt levels, but the company said it was not considering raising equity capital.

Much depends on how Synlait — a dairy company and maker of infant formula — trades from here on, but a capital raise may indeed be required, analysts said.

Synlait’s share price has been under pressure, trading around $1.46 — down $2.31 or 61.3% from last December’s peak — after a string of downgrades.

‘‘It is trading at a significant discount to its [net tangible assets] so a capital raise can’t be ruled out, or even something more radical where a2 actually buys Synlait and offloads Mataura Valley Milk (MVM), which is a lossmaking business,’’ Devon Funds head of retail Greg Smith said.

Synlait is a2 Milk’s sole supplier of infant formula and a2 Milk is Synlait’s biggest customer by far.

‘‘A2 has got reasonably clear intentions around the investment that they are planning, or willing to make, taking control over the supply chain directly [through MVM],’’ he said.

‘‘On a2’s part, it’s heavily reliant on Synlait Milk. It can’t sell its Chinalabel infant formula without Synlait, because Synlait has the licence.

‘‘It’s not like they [a2] can switch to another manufacturer,’’ he said.

‘‘A2 has got a vested interest in seeing Synlait being in the best shape possible.

‘‘A capital raising can’t be ruled out as an option. Even more radical would be an outright takeover.’’

Forsyth Barr analyst Matt Montgomerie said Synlait’s share price was reflecting uncertainty.

‘‘I pitch it as them being able to trade out of this elevated debt scenario as possible and plausible, but I certainly don’t think it’s without risk, and I think that’s what the share price is telling us at the present time,’’ he said.

‘‘For them to trade out of it, we need to see a clear recovery in earnings or see a pathway to that outside of the full 2023 year.

‘‘And then in the short term being able to get rid of or reduce the elevated inventory that they have on the balance sheet.’’

Mr Montgomerie said a straightout takeover of Synlait by a cashedup a2 Milk was not ‘‘top of mind’’ for the market but was not out of the question.

‘‘A2 can’t do without Synlait and vice versa,’’ Mr Montgomerie said.

‘‘But I still think it’s plausible for them to trade out from here.

‘‘Clearly they are mutually beneficial, with the mix of a2 business leaning more and more towards Chinalabel infant formula — and their reliance or the need for Synlait only increases given the licence that it has over the Dunsandel sites,’’ Mr Montgomerie said.

Montgomerie did not think Synlait would sell assets to repay debt.

If and when it does come to a capital raise or a takeover, a2 certainly has the cash for it.

In its halfyear profit report, the company said it had $700.2 million in cash on hand.

Synlait’s market capitalisation stands at $320 million.

Together, a2 and China’s Bright Dairy own about 60% of Synlait.

Synlait has $180 million in bonds trading on the NZX, which roll off in 18 months.

The company last went to the market in November 2020, raising $200 million. —